Human Capital Mcs I Ert And Analytics - CIPD

1 Definitions of capitals relevant tohuman capital metricsTo understand human capital metrics theory and practice, it is important to appreciate howhuman capital is conceptualised with regards to management, strategy and humanresources management. In this chapter the relevant theories of human and social capital arediscussed.Human capitalHuman capital has been defined as the knowledge that individuals acquire during their lifeand use to produce goods, services or ideas in market or non-market circumstances (OECD1996, p22). The term was popularised by Gary Becker, who developed economic theory toexplain how investments in human capital (schooling and work-related training and learning)contribute to the productivity of individual workers, and by extension the marginalproductivity of firms that employ them. The marginal productivity of firms then determines thewage structure, which influences the incentives that firms and workers have to invest indeveloping workers’ human capital (Becker 1975). Despite the widespread use and appealof Becker’s conception of human capital, his approach has been criticised for being overlyreductionist. According to critics, it reduces workers to a commodity defined by their marginalproductivity, by extension denying or ignoring their agency. It also reduces society to asystem of economic production, ignoring that societies are also systems for socialreproduction with power structures and inequalities that the powerful and wealthy seek toreproduce at the expense of those without power or wealth (Bowles and Gintis 1975). Fromthe perspective of human capital metrics in organisational practice, Becker’s methodologicalindividualism means that firms are treated as a black box, because Becker largely ignoresthe way that social context shapes the development of social capital within a firm. This islimiting if we want to use Becker’s ideas as a conceptual underpinning for studying HCmetrics in practice, because they have very little to say about the causal relationships withinorganisations (the very thing that organisations are seeking to use HC metrics tounderstand).Nevertheless, the idea of human capital has crossed over into popular managementdiscourse. Organisations conceive of their workers as human capital, who they invest inwhile seeking to maximise the returns on their investments. For example, the utilitiescompany SSE produces a Human Capital Report, which defines human capital thus: ‘Thehuman capital of a company is the sum of the current and future economic valuation ofthe skills and capabilities embodied within all the individuals that make up the total workforceof the organisation’ (SSE 2015). Consequently, management theorists have sought todevelop ideas that facilitate the study of human capital within the black box of theorganisation. In an organisational context, human capital is taken to mean value-creatingskills, competencies, talents and abilities of the workforce (Elias and Scarborough 2002,2004), which is increasingly abbreviated to knowledge, skills, abilities and othercharacteristics (KSAOs). One recent review article has argued that, in an organisationalcontext, human capital should be referred to as human capital resources to differentiateorganisational human capital (which is the value-creating agglomeration of the KSAOs ofmany workers) from individual-level human capital of workers studied by labour economists(Ployhart et al 2013). A number of recent books have sought to theorise and explain how the6

contribution of human capital to organisational performance can be measured and modelledthrough the development of HR analytics programmes (Boudreau and Ramstad 2007,Hoffman et al 2012, Huselid et al 2005, Huus, 2015, Lawler et al 2004).Social capitalFrench sociologist Pierre Bourdieu was one of the foremost critics of Becker’s approach tohuman capital. For Bourdieu capital takes many different forms: social, cultural, economic,symbolic. Possession of different forms of capital then determines the location of an agent(which could be an individual worker or a firm) within a social field. The social field is a ‘fieldof power’ in that different agents seek to advance their interests using their capitals to do so.Bourdieu therefore used the notion of ‘capitals’ in a different way from Becker. While Beckerconceives of human capital as a property of the individual which affects economic outcomes,Bourdieu sees capitals as products of a social system which become attached to individualsor organisations, which then have a role in reproducing that social system over time. In thiscontext Bourdieu defines the social capital of organisations as ‘the totality of resources(financial capital and also information etc.) activated through a more or less extended, moreor less mobilizable network of relations which procures a competitive advantage by providinghigher returns on investment’ (Bourdieu 2005, p195).A number of American social scientists (Buchanan 1986, Coleman 1988, Putnam 1995) alsopopularised the term at around the same time as Bourdieu, but conceptualised it differently.Social capital is seen as a key determinant of human capital formation, a property of acommunity or neighbourhood and the individuals within it, which shapes the human capitalthat individuals are able to acquire. Putnam sought to explain the term through the use ofpopular phrases such as ‘birds of a feather flock together’ and ‘it’s not what you know, it’swho you know’. Both Buchanan’s and Putnam’s analysis was grounded in a nostalgicconcern that the dense networks of social capital that had defined American society sincethe nineteenth century (de Tocqueville 2000) were being eroded, with significant economicand social consequences, particularly for poorer Americans. Management research into therole of social capital in value-creation within organisations has drawn on ideas from networktheory (Granovetter 1973), studying the nature and content of social ties between individualswithin and around organisations and the ways in which these ties lead to outcomes such asinnovation and sales (Adler and Kwon 2002).Note that while Bourdieu’s conception of social capital is conceived as part of a widercritique of Becker’s approach, there is no such tension between the way that Buchanan,Coleman and Putnam use the term; indeed, the latter version of social capital can be seenas a complement to Becker’s approach. It is not then that there are inherent tensionsbetween ideas of human and social capital, but between social scientists who conceive ofhuman and social capital in individualistic terms and who are interested in how it contributesto economic outcomes (Becker, Coleman) and those, typically working in a Marxian tradition,who reject methodological individualism and stress instead the importance of studying asocial and economic system in its entirety, including the study of social reproductionalongside the study of economic production (Bowles and Gintis, Bourdieu). Empiricalmanagement scholars interested in studying the role of social capital in value-creation haveimplicitly accepted the critique of Becker’s methodological individualism by grounding theirresearch in network theory.7

Other capitals in an organisational contextA recurring critique of the ideas of social and human capital from management scholars isthat the terms are too broad to be useful in empirical research, so more precise definitions ofthe value-creating components of social and human capital should be developed andutilised. This has led to the use of terms such as KSAOs and also of attempts to identify anddefine other intangible forms of organisational capital. These include intellectual capital (IC)– the use of knowledge and skills by workers to create value (Swart 2006) – and knowledgecapital, which Hoffman et al (2012, p139) conceive as comprising organisational knowledge,best practices and proprietary methodologies.8

2 Human capital measures, metrics anddefinitions: what does the HR literaturetell us?The purpose of this section is to summarise key literature on the theory and practice of HCmeasures and metrics. This section first describes some of the metrics and their uses. Wefind a large number of metrics have been put forward, but there is no consensus on whichmetrics should be considered the most important. Therefore, we then present and evaluatedifferent theoretical approaches for using metrics, before presenting a review of the evidenceon how metrics are being used in practice. A detailed account of the methods used toconduct this review of the evidence is shown in Appendix 3.Describing human capital metrics and measuresThere are a vast number of different human capital measures and metrics described in theliterature. A flavour of what leading experts in the field consider to be key metrics can befound in the draft guidelines produced by the Society for HRM (SHRM) for the AmericanNational Standards Institute (ANSI – the guidelines were never implemented, a point wereturn to in section 3).Table 1: Proposed ANSI guidelines on reporting on human capital1 Spending onhuman capitala) Total amountspent onemployee(salaries benefits taxes)b) Total amountspent on supportof employeesc) Total amountspent in lieu ofemployees2 Ability to retaintalenta) Voluntary andtotal turnoverb) Turnoverbroken down byjob typec) Industrystandard formulaof FTEterminations/FTE3 Leadershipdeptha) Percentageof definedpositions thathave anidentifiedsuccessor4 Leadershipqualitya) Index ofquestionsaboutleadership fromemployeesurvey5 Employeeengagementa) Index ofquestions onemployeeengagementfrom employeesurveyb) Percentageof opendefinedpositions filledinternallyb) Responserate andmethodology ofsurveyb) Responserate andmethodology ofsurveyd) Total amountinvested intraining anddevelopmente) Totalheadcount andtotal full-timeequivalent (FTE)headcountSource: Bassi et al (2015, p75)9

Metrics cover five key areas: spending on human capital; ability to retain talent; leadershipdepth; leadership quality; and employee engagement. These metrics suggest a number ofdifferent purposes. ‘Spending on human capital’ covers essentially descriptive metrics thatcan be used for tracking labour costs over time or in comparison with industry benchmarks.Ability to retain talent and leadership depth both measure the sustainability of human capital,so can be used to assess the long-term viability and sustainability of an organisation.Leadership quality and employee engagement measures allow assessments of keyemployee attitudes that are widely held to be predictive of behaviour that contributes toorganisational performance (for example Harter et al 2002). However, these metricsconstitute barely a fraction of those that have been described in the literature. For example,the Human Capital Metrics Handbook (HCMI 2013) provides descriptions of over 600different human capital measures. It is clearly not practical to describe all of these measureshere (and to do so would simply reproduce the handbook). Instead, we provide a broadoverview of the questions and issues that measures are being used to address, whileAppendix 1 includes a table containing an extensive set of HC measures as they relate todifferent areas of HR activity.Descriptive measures and measures of activityFirst, HC measures may be used purely descriptively, to provide an accurate portrait of anorganisation and people-related activities. How many people are employed? What do theydo? How much are they paid? How many are quitting? What skills do they have? Theanswers to questions such as this can then inform the development of HR and operationalpolicies and practices, for example, ‘how many more workers do we need to recruit to delivera new product or service?’, ‘what recruitment channels are likely to be the most effective?’,and so on. The essential point about this approach is that HC measures are used in anessentially ad hoc way, with data being called on to address problems and issues as theyarise in a largely un-strategic manner.Data quality is a key issue for this type of HC measure. Data quality depends on datagovernance: the protocols put in place to ensure that accurate data is recorded in a timelyfashion and the processes for regular checking and monitoring to ensure that theseprotocols are followed. Reports from the practitioners (for example, CAHRS 2014a, 2014b)suggest that establishing good data governance is hard, and can be a major impediment tothe adoption of metrics-based approaches to HR.Use of descriptive measures in scorecardsDescriptive HC measures may also be used in a more explicitly strategic way as part of a‘scorecard’ approach to strategic management (Huselid et al 2005). Under this approach,strategic analysis first identifies key measures and metrics that are held to be importantdrivers of organisational performance, for example, team engagement scores or quit rates.Managers are then assessed against how well they achieve targets related to these metricsor measures. Key measures are likely to be reported through dashboards with a red, amberor green (RAG) rating used to identify which measures are performing in line withexpectations, in need of monitoring or in need of urgent attention. The effectiveness of thisapproach is likely to hinge on the quality of the initial strategic analysis: has it identified theright metrics to focus on? Poor-quality strategic analysis may result in too many measuresbeing reported in dashboards, with the result that managers are unable to identify thosewhich are most important and merit the most attention.10

Measures of efficiency and effectivenessHC measures may also capture the efficiency or effectiveness of different people processesand activities. Note that in this context there may be important differences between efficiencyand effectiveness. Measures of efficiency relate to the efficiency of HR processes andactivities. For example, ‘cost of recruitment per new recruit’ measures the efficiency of therecruitment process. By contrast, measures such as ‘new-hire failure rate’ or ‘percentage ofnew hires who become high-performers within 12 months’ are measures of the effectivenessof recruitment and selection. Huus (2015) makes the case that measures of efficiency areconceptually different from measures of effectiveness. She conceptualises efficiencymeasures as ‘HR statistics’ and argues that they belong in the same class of measures asbasic descriptive data on the workforce, providing measures of how efficiently the HRfunction services the organisation. Huus sees effectiveness measures as human capitalmetrics, more broadly focused on all people-related decisions and results. A similardistinction is invoked by Mark Huselid and his colleagues in their work on applying ascorecard approach to HC metrics (Huselid et al 2005). They differentiate between HRscorecards, which include key measures of HR activity that are critical to the business, andworkforce scorecards, which are based on broader measures of human capital. Despite theconceptual distinction drawn between measure of efficiency and effectiveness, some HCmeasures may relate to both concepts. For example, a measure such as ‘time to recruit’ is ameasure of HR efficiency, but it also represents information about the effectiveness ofrecruitment processes. If time to recruit starts to increase, it may have a detrimental effect onorganisational performance, because key posts remain unfilled.‘Soft’ HC metrics: uses and issuesHuus’s (2015) and Huselid et al (2005) conceptualisation of HC metrics as broadly focusedon people-related decisions and results suggests specific sorts of HC measures related toworker attitudes and behaviour: measures of leadership effectiveness, worker attitudes (forexample engagement), behaviours, competencies, performance and culture, because theseare held to be measures that explain variation in operational and customer metrics that arecritical to organisational performance. These are considered ‘soft’ measures, because theyare based on subjective perceptions and judgements rather than ‘hard’ measures of activityor performance. Descriptive measures may be brought together with these types of ‘soft’performance measures to understand the contribution of different types of workers to anorganisation, for example to look at performance or engagement by age or job tenure.Recent research suggests that the use of this sort of ‘soft’ HC metric can be problematic.Measures of one type of soft measure, for example engagement, are typically based on welldesigned and carefully validated scales developed by occupational psychologists. Despitethis, gaps may open up between scientific and lay understandings of what such measuresmean. Further, these gaps and misunderstandings may actually reflect the way that thesemeasures are promoted by the companies that conduct the surveys. To take the example ofemployee engagement, psychologists see engagement as a psychological state that is atleast in part a property of the individual (for example, Schaufeli et al 2002). However,popular engagement tools, such as the Gallup 12 (Harter et al 2006), do not measureengagement as a psychological state, but focus on subjective measures of aspects of workthat are held to be antecedents of engagement. The extent to which individuals’ responsesreflect individual psychological dispositions to be engaged compared with actual objectiveworking conditions are unclear (Guest 2014), but the interpretation of these scores oftenrests on the assumption that they accurately measure objective working conditions. Thismeans that in psychological terms, engagement should be a measure of psychological state.Managers may also believe that this is what engagement measures, but commo

capability in appreciating the value and implications of data in modern business, it is important that a clearly articulated evidence base can be accessed and utilised by HR professionals of all seniorities and ca